Linsanity: Why the NBA Eastern Conference needs Jeremy Lin

Jeremy Lin, New York Knicks point guard and Harvard economics graduate, has become an overnight sensation.  He has averaged almost 27 points and 8 assists per game over the past five Knicks games(all wins), including 38 against Kobe and the Lakers last Friday night.  It may sound strange but the Eastern Conference, home of LeBron James and reigning MVP Derrick Rose, needs Lin, who Magic Johnson compared to Steve Nash and John Stockton.

Magic Johnson and Steve Nash are arguably the NBA’s two best point guards in the past 35 years and they played in the West.  Outstanding point guards raise their team’s offensive efficiency by creating better shot opportunities and increasing shooting percentages.   Magic’s Lakers led the NBA in effective shooting percentage six times in the 1980s and never ranked lower than third in the league.  Nash’s Suns led the NBA in shooting for six straight seasons from 2005 to 2010 until Tony Parker’s Spurs led the league in 2011 (four of the top five teams last year were from the West).

Over the past 32 years the average Western Conference team generated 0.8 more assists per game, made 1/2 of one percent more of their shots, had 1.3 more possessions and scored 2.4 more points per game than their Eastern Conference rivals.  (All of these differences are statistically significant with probability values less than .00001).  The Western Conference has been the home of more efficient offenses, as the result of better point guard play, since the introduction of the three point basket.

The Nets will probably lose Deron Williams, their star point guard, if they do not attract Dwight Howard to Brooklyn.  Another outstanding Eastern Conference point guard, Rajon Rondo, has been the subject of trade rumors since the lockout ended.  The East/West imbalance in point guard play will be exacerbated if Williams or Rondo moves to a team in the West.   But if Jeremy Lin continues on the pace he established in the past five games, the East will begin to narrow an offensive efficiency gap that has lasted for years.

Location, Location, Location

This recession, with a weak job market and declining home values, has been especially tough on the middle class.  Two of the most valuable assets of middle class households are human capital and residential housing, which are poorly diversified.  Financial investments can be spread across many securities so that losses from one investment can be mitigated by gains from others.  You can’t trade shares of ownership in your home or human capital to diversify your investment.

Housing has been a poor investment relative to equities since the end of 2006.  The most recent Case-Shiller 20-city price index indicates that home values in these cities declined by 32% over the past five years while the Standard and Poor’s 500 index declined by about 5%.  To make matters worse property values are closely related to employment and wages in a metro area.  Cities hit hard by declining property values have experienced reductions in household wealth, lower consumer spending and falling employment and income.

A simple linear regression of home values on metro area employment (from the BLS) across the 20 Case-Shiller cities indicates that each one percentage point decline in an area’s employment is associated with a 3.2% decline in home values.  This significant positive covariance is statistical evidence that buying a home in the city where you work is putting the bulk of your financial eggs in one basket.

There are 8 Case-Shiller cities that have been hit particularly hard by the recession: Atlanta, Cleveland, Detroit, Las Vegas, Los Angeles, Miami Phoenix, and Tampa.  The following figure indicates that employment fell by 9% and home values by 44% in these cities between the beginning of 2007 and the end of 2011.

There are another 8 Case-Shiller cities where the recession has been somewhat less severe: Boston, Charlotte, Dallas, Denver, New York, Portland, Seattle, and Washington, DC.  The following figure indicates that employment fell by 1.3% and home values by 18% in these cities between the beginning of 2007 and the end of 2011.

For working class households the depth of the recession depends on location, location and location.  Job losses are concentrated in cities with the biggest reductions in household wealth due to declining home values.  Our tax code, with mortgage interest deductions and capital gains exemptions for owner occupied housing, encouraged the middle class to view their home as a means of accumulating wealth.  Decades of policies encouraging investment in residential housing over diversified mutual funds made middle class households especially susceptible to the risk of a housing price bubble.

Although the labor market started to recover over the past two years it is much weaker in cities where many houses are in foreclosure.  Job creation has lagged and the labor force is shrinking in cities with distressed real estate markets.  Will the just announced $26 billion mortgage foreclosure settlement involving five of the largest mortgage servicers and 49 of 50 state attorneys general help?  Critics on the right and left are skeptical. President Obama just unveiled his proposal to offer government assistance to homeowners who are underwater on their mortgage but not in foreclosure.  Critics of this plan fear that it could sink the taxpayer backed Federal Housing Administration and delay the inevitable and necessary process of market clearing.

Regardless of how we navigate our way through the current mess serious tax reform should address the home mortgage interest deduction and capital gains taxes on home ownership.  These reforms would not just broaden the base and lower marginal tax rates they could make working class households less susceptible to the risk of future housing price bubbles.

Turning the Corner

When I saw last Friday’s encouraging jobs report I knew it would be controversial.  An increase in payroll employment of 243,000 is good news, but any January report contains a large seasonal adjustment because it is typically the weakest month of the year for employment.  The Bureau of Labor Statistics generates a new seasonal adjustment factor every month, to allow for changing economic conditions, but it means that no two January adjustments are the same.  Skeptics, such as Zero Hedge, correctly observed that the past two January seasonal adjustments have been especially large which might account for 100k of the job gain reported last week.

The Bureau of Labor Statistics is faced with an incredibly challenging task.  It must generate a near real-time count of the country’s total payroll and report it as if January was no different than June.  I know things are out of hand when Rush Limbaugh and Rachel Maddow are commenting on the appropriateness of the government’s seasonal adjustment process.  It is unfortunate that last week’s solid report was obscured by an opaque statistical methodology.   I prefer a more transparent method for presenting high-frequency changes in payroll employment.  My approach shows slow and steady improvement in the aggregate labor market throughout 2011.

First, I consider average payroll employment over a quarter year to mitigate the noise in any single month’s report.  Second, I compare year-over-year percentage changes in quarterly employment rather than use a confusing and complicated method for removing seasonal effects.  The following figure presents these changes in payroll employment for all of 2011 and January 2012.

Employment grew by 1% annually in the first half of 2011 and by 1.2% and 1.3% in the third and fourth quarters.  The January jobs report is encouraging because it reflects a 1.5% annual employment growth rate.  Of course the next two monthly reports will have to be equally strong to maintain a growth rate of 1.5% for the entire first quarter of 2012.

Quarterly year-over-year changes eliminate some of the noise in monthly reports and their evolving seasonal adjustments.  Conventional wisdom, fueled by noisy monthly reports, is that the labor market recovery sputtered in the second half of 2011.  In fact, the labor market has been improving slowly and steadily.  There are problems to be sure.  Annual employment growth of 1.5% is better than we have seen recently but it’s painfully slow given the deep recession.  More importantly, as I will show in future posts, the labor market remains especially weak for less skilled workers and in areas hit hard by the real estate crisis.

I Know What You Didn’t Do Last Summer: Find a Job

The unemployment rate for teenage workers is 23.2%, but that doesn’t fully describe the problems teens face finding summer and part-time jobs.  Employment fell sharply during the recession and no group was impacted as much as teenagers.  Summer employment of teens fell by 2.15 million, or 30%, between 2006 and 2011.  There is no indication that the youth labor market is about to improve; although overall employment increased by about 3 million over the past two years it has not increased for teens.

The following chart shows the teenage employment to population ratio over the past 25 summers.  Employment rates are reported separately for men and women and African Americans and Whites.  The employment to population ratio fell more for men and African Americans than for women and Whites.  In the summer of 2011 fewer than one in 6 African American teens and fewer than one in 3 White teens had summer jobs.

Traditionally, teen employment has been higher during the summer months than the school year.  The following chart shows that nearly half of White teens and one quarter of African American teens were employed during the school year as recently as 2000.  Since then employment rates have fallen dramatically, but more for men than for women.  In the fall of 2011 only 25% to 30% of White teens and 15% of African American teens were employed.

Teenage women are now slightly more likely to be employed than teenage men.  This means that young women are not only more likely than young men to complete high school and enroll in college, they are more likely to work while in high school.

Teen joblessness is an especially serious problem in poor areas and neighborhoods.  According to the American Community Survey the areas with the lowest teen employment rates include: northwestern Mississippi, the Bronx, parts of Louisiana ravaged by Hurricane Katrina, and the south side of Chicago.  A summer job, with an opportunity to acquire basic labor market skills, could be a valuable experience for the youth in these areas.

Teen employment has fallen steadily over the past 25 years and quite dramatically since 2006.  There is little doubt that the recession accelerated the decline in job opportunities for teens.  Although the FLSA allows a temporary sub-minimum wage for teens, it is also likely that the 40% increase in the minimum wage from 2007-2009 adversely affected the youth labor market.

High school seniors now graduate with less work experience than at any time since the Labor Department began tracking these data in 1948.  This would be less of a concern if high schools provided the vocational skills demanded in the 21st century labor market.  The job market for new high school graduates is likely to lag the rest of the economy until graduates can acquire marketable skills while on-the-job and enrolled in school.

Steve Rattner is no Clint Eastwood

Clint Eastwood’s compelling halftime in America commercial has generated a lot of buzz.  Regardless of one’s political views about the precedent set by government bailouts of America’s largest corporations, the ad reminds us that we want cities like Detroit to recover.  Ironically the Eastwood commercial was produced in Los Angeles, where the problems of joblessness and depressed real estate values are comparable to Detroit’s.

Today on morning on Morning Joe Steve Rattner, MSNBC economics analyst and former Obama Administration car czar, presented a defense of the automaker bailouts that he helped design.  Steve Rattner’s charts purport to show that the bailouts saved Detroit.  Rattner focused on the unemployment rate rather than job creation or the size of the labor force.  Labor economists know that Detroit’s unemployment rate can fall if enough people either stop searching for work or leave town.  It appears that a shrinking labor force is a big part of Rattner’s story of a Motor City Miracle.

First here is the key chart presented by Rattner that caught my eye:

Here is a chart that I wish Rattner had presented:

Employment in Michigan and Detroit has grown at about the same rate as the rest of the U.S. over the past two years.  A noticeable difference between Michigan and the rest of the U.S. is that the labor force is shrinking in the Detroit metro area and in Michigan.  Whether this is because jobless workers have given up looking for work, older workers have retired, or people have left the state would require further study.

Detroit is healing, but not in a way that is noticeably different than the rest of the country.  Steve Rattner wants to give credit to the automaker bailout for the large decline in Detroit’s unemployment rate over the past two years.  At the same time, he would not conclude that the bailout caused Detroit’s labor force to shrink faster than elsewhere in the U.S.  It is still unclear what precedent the Federal government has set by intervening in the auto industry rather than just letting large corporations file for bankruptcy.  It is also unclear, at this point, how many jobs were “saved” in Michigan and Detroit by this policy.

The Super Bowl and the Oscars

For the second year in a row, 111 million Americans watched the Super Bowl.  Prime time television has been dominated by reality shows, of late, with American Idol holding the top spot among network shows six years running.  The Super Bowl has become the reality television event, surpassing the ratings of all other broadcasts year after year.

Network television ratings have declined steadily over the past few decades as networks face increased competition from cable, satellite, and online videos.  The Super Bowl has defied this trend.  There was a time when the Academy Awards show was the television event of the year.  The first few Super Bowls drew about the same audience as the Oscars.  Since then it hasn’t even been close.

As I watched Sunday’s game I realized that the Super Bowl, as an event, has taken the place of the Academy Awards in many ways.  The comic relief previously supplied by Bob Hope, Johnny Carson, or Billy Crystal has been replaced by amusing commercials, some starring Jay Leno and Jerry Seinfeld.  An over-produced half-time show has replaced the song and dance routines that opened each Oscar telecast.  Although we saw fewer movie stars Sunday than at the Dorothy Chandler Pavilion, Matthew Broderick and Clint Eastwood were trying to sell us cars.

For many years the game didn’t live up to the hype.  Between 1983 and 2001 only 2 of 19 Super Bowls were decided by less than a touchdown, and the audience did not grow.  Seven of the last 11 games were decided by six points or less, and the audience has grown by 30%.  The audience for Sunday’s game, which came down to the last play, peaked in the fourth quarter at 117 million.  As long as the games remain competitive the Super Bowl will likely be the only network telecast with an audience that increases each year.

Could it be the Weather?

Friday’s jobs report showed that the economy lost almost 2.7 million jobs between December 2011 and January 2012.  That’s pretty good for a January.  In the world of labor statistics and seasonal adjustments it translates into a gain of 243,000 jobs.  How does that work?  The Job loss of 2.02% in January of 2012 was better than what we have seen recently.  If we exclude the change from December 2008 to January 2009, at the depths of the recession, the average December to January change since 2006 was a decline in employment of 2.11%.

We learned on Friday that employment is 9/100 of one percent higher than it would be have been if January 2012 was like the typical January in recent years.  With total employment in the U.S. of approximately 130 million, this means there were 117,000 more people working in January than we would have otherwise expected.

What does this mean for our economic outlook?  It could be that employment was slightly higher due to an unusually mild winter.  It could be that fewer seasonal workers were hired heading into the holidays and laid off in January.  The January employment declines in retail and leisure and hospitality were unusually modest; 3.4% compared to the typical 3.6% decline.  These two industries account for half of the 117k additional jobs.

Friday’s jobs report may be signaling that the labor market recovery is accelerating as we head into 2012.  Or it may indicate that consumer spending was a little higher during an unusually mild January.  If the latter is correct we should be prepared for smaller than usual employment gains as we head from winter into spring.

Vanishing Private Sector Unions

Yesterday Indiana Governor Mitch Daniels signed the law making Indiana the only right-to-work state in the Rust Belt.  Earlier this week pollster Scott Rasmussen reported that 74% of voters favor right-to-work laws that would eliminate mandatory dues and make it much more difficult for unions to organize.  Public employee unions are also being challenged.  In November Ohio voters rejected a law that restricted the collective bargaining rights of public sector unions, and Wisconsin Governor Scott Walker is facing a possible recall after signing a similar bill in Wisconsin.

Voters’ sentiments seem to reflect their labor market experiences.   Private sector unions are vanishing, which will erode support for laws and regulations that strengthen or preserve their bargaining power.  On the other hand membership has never been higher in public sector unions.  I expect well-organized opposition to bills such as the one introduced in Arizona, which limits the collective bargaining power of public sector unions.

The latest Labor Department data indicate that union members comprise only 6.9% of the private sector workforce.  Private sector union membership rates peaked in the 1940s and 1950s at about 1/3 of the workforce.  Unions were virtually nonexistent until the 1960s.  Today the situation has reversed and there are more union members in government than in the private sector.

Union members are older than non-union workers.  In the private sector there are about the same number of non-union workers under the age of 30 and age 55 and above.  Among union members there are 2.5 workers age 55 and above for each worker under 30.  The following figure illustrates private sector union membership rates for four different age cohorts.  The only age group that ever experienced membership rates in excess of 20% includes workers who are now age 55 and above.  Younger age cohorts have seen stable membership rates of 10% or less.  If these trends continue no more than 5% of the Millennial Generation will ever be (private sector) union members.

The aging of the private sector union workforce means that the issues that matter to Richard Trumka, and the AFL-CIO, are unlikely to energize younger voters.  Voters who never belonged to a union show little interest in recess appointments to the National Labor Relations Board, NLRB rules changes that give unions an organizing advantage, the NLRB’s opposition to Boeing’s plans to shift production from Washington to South Carolina, or Indiana’s right-to-work law.  In an earlier era when the AFL-CIO had more political clout, these issues would have been pivotal in an election year.

Local government employees, such as teachers, sanitation workers, police and firemen, have the highest union membership rates that we have ever seen in any sector of the economy in U.S. history (43%).  The battleground for the labor movement has shifted to laws that limit the collective bargaining rights of unions representing government workers, as in Arizona, Ohio and Wisconsin.  These laws have gained support as local governments have been squeezed by declining property values and tax bases and increasing costs of health care benefits and pensions.  The result of the efforts to recall Governor Scott Walker will foreshadow whether public sector unions can maintain their bargaining power and political clout.

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